100 Days Later: Looking Forward For Brexit Businesses
Currency expert Jake Trask looks back on the EU referendum and wonders what the future holds for the pound and British businesses
Saturday 1 October marked 100 days since the EU referendum.
Although polls were tight, very few Britons on either side of the Remain/Leave split actually believed Brexit to be a tangible possibility ahead of the vote. Just one week before the Referendum, bookmakers were only offering odds of 1/10 on Remain winning, and the shock decision to leave the European Union sent ripples through political and economic systems alike.
Of course, one of the most keenly felt developments has been currency instability and its impact on businesses.
The unforeseen triumph for the Leave campaign caused an unprecedented fall for the pound in relation to the US dollar, from around 1.50 at 11pm on the 23 June to 1.32 just six hours later. On 6 July the pound fell even further, dropping below 1.28 for the first time since 1985. It also dropped to 1.1450 against the EUR on August 16 – a three-year low.
Whilst this trend was a boon for those who export, business owners who rely on imports have been drawn into a web of uncertainty, with a weak pound exposing them to significant additional costs. This has splintered British businesses into two camps – exporters, who are benefitting from the current state of the pound and can employ forward contracts to lock in lucrative post-Brexit exchange rates for even longer, and importers, who face increased costs until the pound recovers.
But it doesn’t end there. The Bank of England slashed interest rates for the first time since the financial crisis, taking them to another all-time low of .25%. With interest rates so low, now is a good time for companies to get their hands on a small business loan – if they qualify, of course.
The volatility still to come
In the longer term, the next 100 days are unlikely to witness a resurgence of the pound to its pre-Brexit value.
The new chancellor, Philip Hammond, is set to release his Autumn statement next month, and this will be a critical moment for business owners adjusting to their new relationship with the European Union. The original goal of returning the UK’s trade balance to a surplus has been thrown to the wayside, and it will be interesting to see what loosening of fiscal policy he will announce to counter the effects of Brexit. Some sort of infrastructure or house building programme is likely, in an attempt to stimulate the UK economy. But regardless of the steps he chooses to take, his efforts will struggle to neutralise the pressures placed upon businesses by the vote.
And it’s not just from within the borders of Europe that Britain is threatened by volatility. Stateside, the battle between Donald Trump and Hillary Clinton for the US presidency could undermine the US dollar. Should Mr Trump be awarded White House residency by the American populace, his divisive rhetoric and polarising opinions could adversely affect the stance of the dollar, driving investors towards more stable currencies like the Swiss franc or Japanese yen, and even further from the British pound.
Setting up a currency strategy
Sterling’s instability means that businesses need to insulate themselves and get a strong currency strategy in place as soon as they can. There are a number of tools that businesses can use to protect from currency risk, so the combination you choose depends on the type of business you run, and your appetite for risk.
Forward contracts are a good buffer for businesses that are happy with today’s rate, and want to lock it in for the future. With this tool, businesses can purchase foreign currency at the current rate, and agree to receive the funds at some point in the future – a good way to defend against any appreciation in the pound.
On the other hand, if currency fluctuation serves in your interests – for instance, if you’re after a stronger pound, or can wait for it to slide further – limit orders will enable you to nominate a preferred exchange rate at which your funds will be transferred once reached by the market. Equally, businesses can also leave some of their funds open to spot trades, so they can jump on favourable exchange rates and transact whenever they arise.
It has never been more crucial for businesses to have a thorough grasp of currency and how they can protect themselves from the risk it entails – not just for the next 100 days of Brexit. Irrespective of your business model, if you’re trading overseas, a sound currency strategy will be crucial to making it through this storm intact.
Jake Trask is a currency expert at UKForex,where he helps businesses manage their currency exposure.